How Digital “Piracy” Creates Value

EBay just sold a large portion of Skype after a long legal dispute with Skype’s founders. What interested me was the Skype’s code evolved from the founders’ earlier venture, the file-sharing system, Kazaa. In effect, the experience with the “illegal” Kazaa allowed the founders to develop technology that had a great value, especially for people communicating internationally.

The founders, Niklas Zennstrom and Janus Friis, blocked the sale for a long time on the grounds that EBay violated an agreement not to tamper with the code without their approval. In effect, Ebay acted like a pirate, while the pirates became anti-pirates.

Perhaps someday someone will catalog all the other benefits that that the pirates developed.

“eBay has formally settled the litigation around its sale of the Skype online calling service. The founders of Skype, Niklas Zennstrom and Janus Friis, will drop their lawsuits against the company and a consortium of buyers whose bid to purchase 65 percent of Skype was announced last month, according to an announcement released by eBay before the opening of the stock markets on Friday. As part of the complex agreement, the founders will own a 14 percent stake in the new Skype and receive two seats on the board.”

“The founders will also transfer the disputed intellectual property owned by their company Joltid, which was at the heart of the legal battle, over to Skype.”

“In 2005, when eBay bought Skype from its founders, Janus Friis and Niklas Zennstrom, it paid $3.1 billion. But the company had performed so poorly that by the fall of 2007, eBay had been forced to take a $1.1 billion write-down.”

“Not long after Mr. Friis and Mr. Zennstrom left the company, they became embroiled in a dispute with eBay that has turned into a very nasty lawsuit. It turns out that in selling Skype to eBay, Mr. Friis and Mr. Zennstrom retained control of a key part of the Skype technology, which they licensed to eBay. Although the details are under seal in a London court, the Skype founders’ essential complaint is that eBay tampered with their software, and in doing so, violated the terms of the licensing agreement. They were demanding that Skype be forced to stop using the technology, which, for all intents and purposes, would mean shutting down Skype itself. The case is set for trial in 2010.”

“In a court hearing in London last June, eBay’s lawyer told the court that if Mr. Friis and Mr. Zennstrom won the case, the result would be “devastating”.”

“Skype was not Mr. Friis’s and Mr. Zennstrom’s first company. No, that was the infamous Kazaa, a peer-to-peer company that the two men founded in 1999, not long after Napster showed the world exactly how easy it was to steal copyrighted music using peer-to-peer computing. By 2001, the recording industry, having routed Napster, turned its sights on Kazaa.”

” In 2003, when they started Skype, that same technology that had powered Kazaa became an important part of the Skype code; it was the means by which computer users connected to each other and created a larger network. (VoIP — voice over Internet protocol — was the means by which they spoke to each other online.) But Skype never owned the technology; JoltID did. Why eBay was willing to go along with such an arrangement when it bought Skype two years later will forever be a puzzle. But so long as the two men remained part of the eBay “family,” it didn’t matter much. Any changes to the peer-to-peer code were ones they approved”.”

“When the deal went sour, however, and the founders left eBay, that all changed. And when eBay continued to tinker with the code — something eBay contends it has a right to do under the license — they entered into negotiations that went nowhere. Finally, by March of 2009, the two sides had sued each other.”